Emerging markets and developing countries have long sought to secure greater voting rights and say within the International Monetary Fund (IMF), but previous reform attempts have yielded only limited concessions. Paulo Nogueira Bautista Jr. It presents a gradualist approach to reform that could provide better representation in decision-making.
Reforming the International Monetary Fund (IMF) has been a long-standing goal for developing countries since at least the 1990s. They recognize the relevance of the IMF as an almost universal multilateral institution, especially in times of crisis. This is why emerging markets and developing countries seek a greater voice and representation in the Fund. But progress toward this goal has been uneven and slow, leading to frustration and despair.
This problem emerged after 16 years of IMF.Day Comprehensive review of quotas last December. Quotas play an important role at the IMF and are the main basis for determining member countries’ voting rights. However, this latest review results in only minor changes to the existing framework. This raises the question of whether emerging markets and developing countries should abandon the IMF entirely, turn to alternative institutions and financing mechanisms, or stay with the IMF and continue to push for reforms.
China, Europe, America
Competition between the West, led by the United States, and emerging powers, especially China, is at the root of widespread pessimism about current IMF reforms. The biggest obstacle is that major shareholders of the IMF and high-income countries such as the United States, European countries, and Japan are staunchly opposed to considering reforms that would give China more decision-making power.
China is the most underrepresented country by every imaginable indicator, and therefore the country that would benefit the most from the fund’s allocations and reallocation of voting rights. The other side of the coin is that developed countries, especially European member states, are overrepresented. The state that controls the institution will lose due to quotas and redistribution of votes. Developed countries, especially Europe, are the main cause and main obstacle to reform.
The recent failure to achieve meaningful reform in 2023 was a significant, if not fatal, blow to the Fund’s credibility. Given the many functions of the IMF and the practical difficulties of quickly and completely replacing it with alternative multilateral or sovereign financing mechanisms, the IMF will continue to play an important role for the foreseeable future. However, the geopolitical fractures that have become evident in recent decades may diminish its centrality and relevance.
A gradualist approach to reform
Nonetheless, it would be unwise for emerging markets and developing countries to completely ignore or abandon the IMF. Without giving up their goal of making the IMF more reflective of 21st century realities, they might consider working together to foster consensus on progressive reform attempts.
This includes advocating for measures and specific reforms that can increase the Fund’s relevance to emerging markets and developing countries, especially low-income, small and climate-vulnerable countries. The key to defining a viable agenda is to specify goals that will benefit developing countries and institutions without running up against an entrenched veto from developed countries. This agenda could include at least seven reforms.
conditional reform
The first reform that can be targeted is conditional reform To make it more flexible. It is understandable that countries relying on emergency loans will need to implement adaptive programs tailored to their circumstances. National authorities must face the harsh realities of their dependence on the IMF, and the institution must protect its resources.
However, there are repeated cases where conditions are too stringent, resulting in excessive economic and social costs or failure to implement agreed macroeconomic targets. This harms the credibility of the country and the IMF itself. Conditionality can be reformed not only by revising the criteria followed in an institution’s standard lending scheme, but also by making greater use of new schemes that are more automated and contain lighter conditionality.
Surcharge reduction
A surcharge is an increase in the IMF interest rate applied to loans of larger amounts or longer maturities. Countries that lend longer term beyond certain limits defined by individual quotas are penalized with higher interest rates. From the fund’s perspective, this compensates for the higher risk associated with large and long-term loans.
Reducing the surcharge would benefit all countries dependent on exceptionally high long-term borrowing from the IMF. These will mostly be middle-income countries. The rationale for these cuts is that it makes little sense to impose high interest rates on countries most in need. This runs counter to the IMF’s goal of helping countries navigate severe macroeconomic challenges.
Strengthening concessional funds
The IMF provides concessional loans to low-income countries through a special facility called the Poverty Reduction and Growth Trust. Low-income countries are therefore not exposed to the high costs of borrowing from regular facilities. For the poorest countries, the interest rate on these loans is now zero.
The welcome reform would boost the capacity of low-income countries to address their economic challenges by increasing availability and further reducing borrowing costs from the Poverty Reduction and Growth Trust. The U.S. Treasury Department weighed in on a proposal to strengthen the Poverty Reduction and Growth Trust in September 2023. This increases the likelihood of implementing improvements in this area for the benefit of low-income IMF members.
Increasing the overall resources of the IMF
Increasing the Fund’s overall resources by revising the withdrawal plan for IMF borrowing commitments could be another goal of the reform. The IMF has two types of resources: quotas and borrowings. 16Day A general review of allocations showed that overall allocation size would be doubled, but borrowings would also be reduced by the same amount, keeping overall resources constant. One way to increase the total amount of a fund’s borrowing capacity is to modify the borrowing reduction, setting it to decrease by an amount less than the quota increase.
It is important to distinguish here between poor developing countries and middle-income emerging market countries. Low-income countries will probably view this approach more favorably because they are more interested in borrowing during a crisis than in boosting voter turnout. Emerging market countries, mainly Asian countries, which are underrepresented, would probably be opposed or indifferent to making this a priority because they are more interested in voting rights than in fund borrowing.
Primary voting rate is high
The voting rights of each IMF member are determined by two factors: the overarching individual country quotas and the so-called “basic voting rights.” Primary voting was introduced by the IMF to compensate for country size, leading to the perception that quotas themselves bias voting power in favor of larger countries. The system works by assigning the same absolute number of primary votes to every member state, so that the voting power of smaller countries increases by a larger percentage.
Currently, primary votes account for 5.5% of total votes. The increase in primary voting, which can be seen as a challenge to institutional participation in the United States and other high-income countries, is not a start, but there is still room to increase its use. Increasing the use of primary voting would benefit all small countries, including some small high-income countries such as Singapore, Switzerland and Luxembourg. However, most small countries are developing countries, and many are among the poorest and most climate vulnerable. Therefore, this proposal appears to be defensive.
Third Chair for Sub-Saharan Africa
One of the distortions of IMF governance is the unfair distribution of the 24 chairs of the Executive Board and the International Monetary and Financial Committee. Europe is overrepresented. Emerging markets and developing countries, especially sub-Saharan countries, are underrepresented. Giving a third chair to sub-Saharan Africa could help redress the balance. This issue is not about voting rights per se, but about another important and sometimes overlooked aspect of governance: voice and representation.
fifth vice president position
For a time, the IMF had four Deputy Managing Directors (DMDs). The first vice-governor was always an American national, and there were three other DMDs (one Japanese national, one Chinese national, and one from a middle- or low-income background). Income country.
The latter should represent or “represent” all middle or low-income countries except China. So the imbalance is clear. In addition to the well-known rule of reserving the top position, Managing Director, for European nationals, there are four unofficial rules. Japan, China and all other emerging markets and developing countries. Correcting this imbalance is another priority for reform.
This could be achieved by creating a fifth DMD position in the IMF Executive Branch. A rule could be established so that two out of five DMDs must be citizens of middle-income countries or low-income countries. This would establish a somewhat better geographical balance in the management of the IMF.
The future of the IMF
The approach taken here should be considered a package. This means that to have the desired effect of restoring confidence in the Fund, the proposal will have to be implemented over the next few years as part of the agenda to be targeted and revealed at the General Assembly. Start of the process. The package will be an open package in which certain proposals may be modified, some may be discarded as less practical and other proposals of the same general nature may be added. All of these can be adjusted and improved during negotiations.
However, the sad truth is that even proposals as limited as those presented here are likely to meet resistance from major shareholders, just as they have in the past. But will they realize that this resistance is going too far and that the fund will probably reach its breaking point sooner than expected? Or will we stick to our habitual inertia and obsession with the status quo, relying on the recognition that even an unreformed IMF will remain a relevant and valuable financial institution?
Note: This article gives the views of the author and not the position of EUROPP (European Politics and Policy) or the London School of Economics. Featured image source: christianthiel.net / Shutterstock.com
